Debit Card Nightmare

My headline is only a slight exaggeration. In case you missed it, a federal court in the District of Columbia yesterday struck down the Federal Reserve’s regulations implementing the Durbin Amendment. These regulations have been in place since October 2011 and are designed to implement requirements that merchants have multiple network options when processing PIN and signature debit card transactions, as well as ensure that caps are placed on the interchange fees collected by financial institutions with $10 billion or more in assets. The Judge stayed or delayed his ruling invalidating the existing regulations during which time the Federal Reserve “will have months, not years” to rework its current regulations.

Here are some practical implications of the decision if it is upheld:

Merchants have to have multiple network options for both PIN-based and signature-based debit transactions. For example, the hotel operator that just accepts signature-based debit transactions has to be able to choose more than one signature-based network to process the transaction. Merely ensuring that operator has a PIN-based payment network doesn’t satisfy the law’s requirements.

The Judge suggested that this requirement could be satisfied by lifting network restrictions barring PIN-based transactions from being processed on the same networks that process signature-based transactions.

The FED implemented the Durbin Amendment by capping interchange fees for issuers with $10 billion in assets at $0.21 per transaction. The Court doesn’t specify what that number should be, but it has to be substantially lower to comply with the court’s ruling. Remember that in its initial proposal, the FED suggested a fee of $0.12 per transaction.

In opposing the interchange fee cap, credit unions argue that even though all but a handful of them are exempted from its implementation, any cap on interchange fees will inevitably lower the fees that can be collected by smaller issuers. The jury is still out on whether this will indeed be the case, but the premise is about to be put to the test at a time when fee revenue is already under attack from regulators.

Now for some legal analysis. The court’s ruling reflects a legal debate taking place about how much deference courts should give to regulators charged with implementing federal law. The existing legal framework mandates that agencies implement regulations consistent with a statute’s language. Where a statute is vague, regulators are given authority to interpret those provisions and courts generally must give regulators broad discretion. The legal issue comes down to the question of when a statute is ambiguous enough to permit a regulator like the Federal Reserve increased discretion in interpreting a statute’s language. A clearly exasperated Judge all but accused the FED of ignoring the statute’s mandates: “The interchange transaction fee and network non-exclusivity regulations are fundamentally deficient. It appears that the Board completely misunderstood the Durbin Amendment’s statutory directive and interpreted the law in ways that were clearly foreclosed by Congress.”

[…] reform in the first place. But I am not holding my breath. We won’t know what the new debit interchange fee is for several months. But considering that the Fed first considered a $0.12 fee cap, think of how […]